UK inflation hits 7%

UK data takes GBP to a tipping point

UK inflation (CPI) climbed from 6.2% last month to 7% (Year on Year) in March, which is the highest level since 1992. Economic theory states that high inflation should lead to higher rates which should lead to a stronger currency. However, GBP received only a modest rally on the news.

The FX market is watching UK data, comments and events very closely.

The market has priced in a series of interest rate hikes in the UK, however, as the UK economy comes under pressure from multiple angles (supply-chain issues, Ukrainian conflict, decreased consumer confidence), the Bank of England are expected to tone down their language. If this does happen, and the number of rate hikes is reduced, then GBP will fall back.

USD on the rise:

GBP/USD fell under 1.3000 due to USD strength. The USA has made it very clear (reaffirmed by comments last night) r to markets that they will continue to raise interest rates throughout 2022 and the USD is hitting multi-year highs against a number of currencies – EUR/USD is at 2yr lows around 1.0800. US Consumer Prices rose by 8.5% - the highest rise since 1981.

European growth under pressure:

• German Economic Institute: GDP growth for 2022 almost halved, from 43.8% to 2.7%. Although 2023 growth forecast was revised higher this is negative for the region and currency.

• The Banque de France lowered its growth forecast for the French economy to 0.25% for the first quarter on Tuesday. This is compared to the initially expected growth of 0.5%.

CAD / AUD / NZD

CAD: Interest rate decision this afternoon – a 0.5% increase expected, taking rates to 1%. With the surge in oil prices and higher rates to combat inflation,  the CAD is expected by many economists to keep pushing higher in the medium term.

AUD: Australia left interest rates unchanged this morning, adopting a ‘wait and see’ approach, capping further gains for the currency. AUD has climbed since January, and sits at the top of the 6mth range vs USD.

NZD: Raised rates by 0.5% this morning, the 1st such move since 2000 as the central bank tries to fight inflation. NZD/$ sits at 0.6900, struggling to push further because of USD strength.

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The RedFX Team